Thursday, April 12, 2007

Here's more on the series of posts on supply-side economics, what we knew in the late 1970s and early 1980s, the gulf between academia and Washington, and other issues. This is
Jamie Galbraith from comments with a view from inside "the trenches," a view from a "vulgar Keynesian" who stood "against the Reagan Revolution in
the early 1980s":

James Galbraith: Bruce Bartlett joined the staff of the Joint Economic Committee in 1981, when
I did. I was the executive director in charge of the Democratic staff; Bruce was
the deputy director in charge of the Republican staff. We set up the committee
(which had ten Democrats and ten Republicans, chaired by my boss, Rep. Henry S. Reuss of Wisconsin) so that both sides could fully make their case to the
Congress and public. And we battled merrily for a couple of years, and then in
1983 switched jobs, so that we could continue battling under a Senate Republican
chairman.

Bruce has been a friend ever since, though neither of us yields an inch, I don't
believe, on our economic differences.

This little history makes me, I believe, a useful representative of the despised
sect of "vulgar Keynesians," "crude Keynesians," "discredited Keynesians" and so
forth, not yet heard from in this discussion. I was in fact a product of an
eclectic economics training at Harvard (Leontief, notably), a bracing year among
the Old Keynesians (Kaldor, Robinson) at Cambridge, and a Ph.D. at Yale,in the
environment of Tobin but not under his wing.

Paul Krugman and I became friends at Yale, and remain so, though we too have had
strong differences over the years.

Those of us who were in the trenches, standing against the Reagan Revolution in
the early 1980s, saw things differently from either the shock troops of that
revolution, such as Bruce, or the academic bystanders, including Paul.

I and those around me -- the Democratic staff at the Joint Economic Committee --
were bitterly opposed to Reaganomics, both as economics and politics. Why?

First, because as politics Reaganomics was aimed at enriching the rich and
destroying the economic life of working Americans and the poor. And this is no
joke: it did exactly that. Recession, unemployment, the wanton and irreversible
destruction of major industries and the fiscal base of the cities, the
destruction of unions: all that happened. The cost of curing inflation in
1981-82 was enormous, far higher than the airy comments made above concede. We
crude Keynesians believed then, and I believe now, that the steps taken were
brutal and unnecessary, and that with hard policy work the problem could have
been managed in ways that were far less costly, but that were rejected on
ideological rather than economic grounds.

Brad DeLong's summary of Bruce's summary of our vulgar Keynesian policy beliefs
is, here, reasonably close to the mark, except in one respect. No one in my
circle doubted the capacity of monetary policy to crush the economy if pushed
sufficiently far. Rather, we believed (accurately, as events would prove), that
monetary policy worked against inflation *only* insofar as it brought on a
brutal recession. We did not accept the monetarist/supply-side claim, which was
presented at the start of the Reagan administration in official projections,
that the trick could be pulled off without a recession. We were, of course,
perfectly right about that.

Second, as a matter of economics, we thought that the combination of supply-side
economics and monetarism was fundamentally incoherent -- and we were well aware
that the supply-siders and monetarists disagreed with each other more violently
than they disagreed with us. As an anti-monetarist and one of the very few
Democrats willing to criticize the sainted Paul Volcker, I found myself in rough
alliance with the supply-siders more than once (and I have a few handwritten
notes from Jack Kemp in my files somewhere).

I ultimately came to see the supply-siders as the most effective practical
Keynesians around. They were not only willing to run deficits when the situation
required, but able to do so, because they skewed the benefits toward the rich,
and thus brought political power into play behind the cause of fiscal expansion.
This of course is also what George Bush did in 2001 and in 2003-5.

I didn't like the redistributive bias, and for that reason I fought the Reagan
tax cuts. But I had no doubt, from 1981 onward, that the tax cuts and military
buildup, coupled with a reversal of the tight money policy, would produce a
strong recovery in time for Reagan's 1984 re-election campaign. And it's worth
noting that Reagan had a Tory Keynesian (Murray Weidenbaum) as his CEA chief,
who knew this very well.

Jude Wanniski was a hugely influential force in the supply-side camp, and his
views were the epitome of the supply-side position in Washington. I thought Jude
was a crackpot in economics and economic history (his idea that Smoot-Hawley
caused the Great Depression, notably; also his passionate advocacy of the gold
standard), but there is no doubt that he played a crucial role. There is no
complete or accurate account of supply-siderism without Jude Wanniski; he cannot
be airbrushed from history simply because sober academic types now think him
inconvenient.

Notwithstanding our disagreements, Jude and I also became friends; late in his
life he staged a vehement and prescient stand against the Iraq war.

Incidentally, it is not correct that we crude and vulgar Keynesians were wedded
to high marginal tax rates for their own sake. The Bradley-Kemp tax bill, which
had much more Bradley than Kemp in it, was endorsed by the JEC Democrats in
1984, in a report that I wrote. It became law in 1986. We made the argument for
that bill, because we did understand the usefulness of a broad-based income tax,
and the difference between high marginal rates per se and progressive tax
system. We also understood that the previous income tax structure was
politically indefensible, and that alternatives such as a VAT, which were
serious threats, would be worse.

The 1986 tax reform saved the income tax, and laid the groundwork for the 1993
upper-bracket increases, which did quite a bit to restore the overall
progressivity of the code, and which laid a template for future tax changes.

Turning to the monetarists, it's another forgotten fact that the lead
monetarists on Capitol Hill at that time were Democrats. One of them was Bob
Weintraub, who worked for Parren Mitchell, chairman of the congressional Black
Caucus. Another was Bob Auerbach, a Milton Friedman student. Bob Auerbach and I
both worked for Reuss, and we shared an office at the House Banking Committee
for three years in the late 1970s. Bob A. abandoned monetarism when it fell
apart in the 1980s; he now teaches at the LBJ School, and as a matter of fact,
we had dinner together tonight.

As for the MIT and other conventional-Keynesian academics, those of us in the
trenches found them sometimes helpful but often preoccupied with their models
and largely unaware of the political issues within which these economic
questions were embedded. For instance, we did not have a lot of use for the
theoretical supply-side effects of tax policy on individual behavior that
respectable liberal economists were prepared to concede. The fact was, dwelling
on those supposed effects simply gave aid and comfort to the Reaganauts; there
was no way to make the point in political debate and not give away the store
when it came time to write a tax bill. As a technical matter, it also seemed
clear that the income effects of these tax changes would dwarf the substitution
effects, and the evidence I've encountered since does not incline me to change
this view.

Among academic economists at that time, Bob Eisner was my hero and closest
friend and ally; I think no one would call Bob either crude or vulgar, and that
is perhaps why he is seldom mentioned in these discussions. (His daughter, Mary
Eccles, was on my staff.)

As Brad notes, Rudi Dornbusch was, indeed, a politically- attuned advocate of
the effect of monetary policy, and as he did more politics, he became more
Keynesian. (Rudi's future wife, Sandra Masur, was also on my staff.)

But the idea that monetary policy worked to control inflation expectations
directly seemed to us to be a gross overstatement of its powers. Bob Auerbach
and I designed the Humphrey-Hawkins hearings beginning in 1975, and wrote those
provisions of the HH law in 1978. We did it to extract information from the
Federal Reserve and not because we thought that setting monetary targets would
have some fundamental effect on the psychology of the nation. And while I'm
proud of those hearings, that's because they established the constitutional
authority of the Congress over the Federal Reserve, not because they somehow
cured inflation expectations, as it seems some magical-thinking economists
appear to believe.

To Paul, these issues were sufficiently "academic" at the time that he could in
good conscience accept a staff position in the Reagan administration (on the CEA
under Martin Feldstein, after the first wave of Reaganomics had passed). To him,
at the time, it basically wasn't a political assignment, just a chance to see
Washington under the redoubtable Feldstein.

Perhaps Paul and all the others who lined up in the Reagan camp were right -
that these were academic issues to be debated and resolved among people who all
shared the same larger objectives for the economy. In some ways, I accept this
as a subjective matter. I came to respect the sincerity of Bruce, Jude, Murray
and others working in the Reagan administration about their goals. Otherwise, I
could hardly think as well of them now, as I do.

But to me and those in my camp, at the time, it would have been unthinkable to
go over to their side. At the time, I saw the Reagan administration as,
objectively, a vicious assault on the economic life of ordinary Americans,
brought about by the willful and arbitrary rejection of useful policies that
aimed to solve problems without inflicting savage harm on the weakest economic
agents. I thought, also, that with honorable exceptions the academic economists
on the sidelines were weak and indifferent to that harm.

I don't think I was wrong about that.

JG

Update: Bruce Bartlett, whose column in the NY Times began this discussion, responds to Jamie in comments.

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Jamie Galbraith Speaks for the "Vulgar Keynesians"

Here's more on the series of posts on supply-side economics, what we knew in the late 1970s and early 1980s, the gulf between academia and Washington, and other issues. This is
Jamie Galbraith from comments with a view from inside "the trenches," a view from a "vulgar Keynesian" who stood "against the Reagan Revolution in
the early 1980s":

James Galbraith: Bruce Bartlett joined the staff of the Joint Economic Committee in 1981, when
I did. I was the executive director in charge of the Democratic staff; Bruce was
the deputy director in charge of the Republican staff. We set up the committee
(which had ten Democrats and ten Republicans, chaired by my boss, Rep. Henry S. Reuss of Wisconsin) so that both sides could fully make their case to the
Congress and public. And we battled merrily for a couple of years, and then in
1983 switched jobs, so that we could continue battling under a Senate Republican
chairman.

Bruce has been a friend ever since, though neither of us yields an inch, I don't
believe, on our economic differences.

This little history makes me, I believe, a useful representative of the despised
sect of "vulgar Keynesians," "crude Keynesians," "discredited Keynesians" and so
forth, not yet heard from in this discussion. I was in fact a product of an
eclectic economics training at Harvard (Leontief, notably), a bracing year among
the Old Keynesians (Kaldor, Robinson) at Cambridge, and a Ph.D. at Yale,in the
environment of Tobin but not under his wing.

Paul Krugman and I became friends at Yale, and remain so, though we too have had
strong differences over the years.

Those of us who were in the trenches, standing against the Reagan Revolution in
the early 1980s, saw things differently from either the shock troops of that
revolution, such as Bruce, or the academic bystanders, including Paul.

I and those around me -- the Democratic staff at the Joint Economic Committee --
were bitterly opposed to Reaganomics, both as economics and politics. Why?

First, because as politics Reaganomics was aimed at enriching the rich and
destroying the economic life of working Americans and the poor. And this is no
joke: it did exactly that. Recession, unemployment, the wanton and irreversible
destruction of major industries and the fiscal base of the cities, the
destruction of unions: all that happened. The cost of curing inflation in
1981-82 was enormous, far higher than the airy comments made above concede. We
crude Keynesians believed then, and I believe now, that the steps taken were
brutal and unnecessary, and that with hard policy work the problem could have
been managed in ways that were far less costly, but that were rejected on
ideological rather than economic grounds.

Brad DeLong's summary of Bruce's summary of our vulgar Keynesian policy beliefs
is, here, reasonably close to the mark, except in one respect. No one in my
circle doubted the capacity of monetary policy to crush the economy if pushed
sufficiently far. Rather, we believed (accurately, as events would prove), that
monetary policy worked against inflation *only* insofar as it brought on a
brutal recession. We did not accept the monetarist/supply-side claim, which was
presented at the start of the Reagan administration in official projections,
that the trick could be pulled off without a recession. We were, of course,
perfectly right about that.

Second, as a matter of economics, we thought that the combination of supply-side
economics and monetarism was fundamentally incoherent -- and we were well aware
that the supply-siders and monetarists disagreed with each other more violently
than they disagreed with us. As an anti-monetarist and one of the very few
Democrats willing to criticize the sainted Paul Volcker, I found myself in rough
alliance with the supply-siders more than once (and I have a few handwritten
notes from Jack Kemp in my files somewhere).

I ultimately came to see the supply-siders as the most effective practical
Keynesians around. They were not only willing to run deficits when the situation
required, but able to do so, because they skewed the benefits toward the rich,
and thus brought political power into play behind the cause of fiscal expansion.
This of course is also what George Bush did in 2001 and in 2003-5.

I didn't like the redistributive bias, and for that reason I fought the Reagan
tax cuts. But I had no doubt, from 1981 onward, that the tax cuts and military
buildup, coupled with a reversal of the tight money policy, would produce a
strong recovery in time for Reagan's 1984 re-election campaign. And it's worth
noting that Reagan had a Tory Keynesian (Murray Weidenbaum) as his CEA chief,
who knew this very well.

Jude Wanniski was a hugely influential force in the supply-side camp, and his
views were the epitome of the supply-side position in Washington. I thought Jude
was a crackpot in economics and economic history (his idea that Smoot-Hawley
caused the Great Depression, notably; also his passionate advocacy of the gold
standard), but there is no doubt that he played a crucial role. There is no
complete or accurate account of supply-siderism without Jude Wanniski; he cannot
be airbrushed from history simply because sober academic types now think him
inconvenient.

Notwithstanding our disagreements, Jude and I also became friends; late in his
life he staged a vehement and prescient stand against the Iraq war.

Incidentally, it is not correct that we crude and vulgar Keynesians were wedded
to high marginal tax rates for their own sake. The Bradley-Kemp tax bill, which
had much more Bradley than Kemp in it, was endorsed by the JEC Democrats in
1984, in a report that I wrote. It became law in 1986. We made the argument for
that bill, because we did understand the usefulness of a broad-based income tax,
and the difference between high marginal rates per se and progressive tax
system. We also understood that the previous income tax structure was
politically indefensible, and that alternatives such as a VAT, which were
serious threats, would be worse.

The 1986 tax reform saved the income tax, and laid the groundwork for the 1993
upper-bracket increases, which did quite a bit to restore the overall
progressivity of the code, and which laid a template for future tax changes.

Turning to the monetarists, it's another forgotten fact that the lead
monetarists on Capitol Hill at that time were Democrats. One of them was Bob
Weintraub, who worked for Parren Mitchell, chairman of the congressional Black
Caucus. Another was Bob Auerbach, a Milton Friedman student. Bob Auerbach and I
both worked for Reuss, and we shared an office at the House Banking Committee
for three years in the late 1970s. Bob A. abandoned monetarism when it fell
apart in the 1980s; he now teaches at the LBJ School, and as a matter of fact,
we had dinner together tonight.

As for the MIT and other conventional-Keynesian academics, those of us in the
trenches found them sometimes helpful but often preoccupied with their models
and largely unaware of the political issues within which these economic
questions were embedded. For instance, we did not have a lot of use for the
theoretical supply-side effects of tax policy on individual behavior that
respectable liberal economists were prepared to concede. The fact was, dwelling
on those supposed effects simply gave aid and comfort to the Reaganauts; there
was no way to make the point in political debate and not give away the store
when it came time to write a tax bill. As a technical matter, it also seemed
clear that the income effects of these tax changes would dwarf the substitution
effects, and the evidence I've encountered since does not incline me to change
this view.

Among academic economists at that time, Bob Eisner was my hero and closest
friend and ally; I think no one would call Bob either crude or vulgar, and that
is perhaps why he is seldom mentioned in these discussions. (His daughter, Mary
Eccles, was on my staff.)

As Brad notes, Rudi Dornbusch was, indeed, a politically- attuned advocate of
the effect of monetary policy, and as he did more politics, he became more
Keynesian. (Rudi's future wife, Sandra Masur, was also on my staff.)

But the idea that monetary policy worked to control inflation expectations
directly seemed to us to be a gross overstatement of its powers. Bob Auerbach
and I designed the Humphrey-Hawkins hearings beginning in 1975, and wrote those
provisions of the HH law in 1978. We did it to extract information from the
Federal Reserve and not because we thought that setting monetary targets would
have some fundamental effect on the psychology of the nation. And while I'm
proud of those hearings, that's because they established the constitutional
authority of the Congress over the Federal Reserve, not because they somehow
cured inflation expectations, as it seems some magical-thinking economists
appear to believe.

To Paul, these issues were sufficiently "academic" at the time that he could in
good conscience accept a staff position in the Reagan administration (on the CEA
under Martin Feldstein, after the first wave of Reaganomics had passed). To him,
at the time, it basically wasn't a political assignment, just a chance to see
Washington under the redoubtable Feldstein.

Perhaps Paul and all the others who lined up in the Reagan camp were right -
that these were academic issues to be debated and resolved among people who all
shared the same larger objectives for the economy. In some ways, I accept this
as a subjective matter. I came to respect the sincerity of Bruce, Jude, Murray
and others working in the Reagan administration about their goals. Otherwise, I
could hardly think as well of them now, as I do.

But to me and those in my camp, at the time, it would have been unthinkable to
go over to their side. At the time, I saw the Reagan administration as,
objectively, a vicious assault on the economic life of ordinary Americans,
brought about by the willful and arbitrary rejection of useful policies that
aimed to solve problems without inflicting savage harm on the weakest economic
agents. I thought, also, that with honorable exceptions the academic economists
on the sidelines were weak and indifferent to that harm.

I don't think I was wrong about that.

JG

Update: Bruce Bartlett, whose column in the NY Times began this discussion, responds to Jamie in comments.